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Investors ignore the lessons of history at their own peril!

As I was spending an exciting Friday night playing with market analytics software, I noticed some interesting parallels between the late 1990s and the past few years. Starting about 1995, investors started to strongly favor one asset class above all others. If it wasn’t a growth stock, no one would buy it. Most of us remember this as the “internet stock bubble” – but investors poured money into large cap growth stocks as well, fueling an incredible run up in the growth heavy S&P 500 index. The below chart compares the S&P 500 performance (orange) with a well diversified portfolio with 35% US Stock blend, 15% international, 10% Real Estate Investment Trusts, and 40% fixed income.

A $10,000 investment in an S&P 500 index fund in 1995 would have grown to a whopping $35,000 in just 5 years! Meanwhile, the boring diversified portfolio had “only” grown to roughly $2o,000. Investment advisors in business at the time remember this as the time when clients would threaten to fire them if they refused to abandon their principle of diversification to chase ultra hot growth stocks.

What happened next is where we learn a lot about the value of sticking to a sound investment strategy. Here is the same chart, extended to include the next 5 years, 2000 through 2005.

So what we see here is that sticking with the diversified portfolio – even while the neighbors and co-workers were all bragging about “making a killing” in internet stocks, would have paid off quite well. While over the full 10 year time period, both portfolios managed roughly the same return, the S&P 500 investor suffered a whole lot more pain along the way! But most investors in the 1990’s were late to the party. They didn’t experience the bull benefit of the 1995-2000 increase.

Consider two investors who invested a big wad of cash in January of 2000. One chose an S&P 500 index fund which was red hot, the other listened to his somewhat conservative financial advisor and invested in the diversified portfolio of stocks, bonds, and real estate. How did they fare during the following 10 years (which were referred to in the financial media as “the lost decade”)?

The so-called lost decade was not lost for the guy in the diversified portfolio. He doubled his money even while the S&P investor made NOTHING for 10 years! This in spite of the “Great Recession” and financial crisis of 2008!

So what is the lesson for today?

For the last couple of years, markets seem to have moved back to a belief that the S&P 500 and U.S. stocks are the only place one needs to invest. We are four years beyond any talk of “The Lost Decade” and investors have watched the S&P 500 outperforming all other investments once again. In comparison, returns on the staid old diversified portfolio seem kind of boring in comparison. International stocks haven’t done well for a few years. Bonds are doomed the “experts” tell us (and have been saying for 3 or more years now, while they have continued to provide stable returns). U.S. stocks are the only place a sane investor should want to be right?

Am I the only one who sees a similarity here to the first chart from 1990-1995?

Now, I’m not predicting a market crash, I don’t have a crystal ball. Some very smart people say the market is going to keep going up. Other very smart people say it is going to go down. A few doomsayers selling books say that civilization will be coming to an end and we will be foraging for food in a zombie apocalypse. That’s pretty much the way it is every year with the stock market.

With history as my guide, I would never bet against the long term power of diversification. When the market does fall, it is typically the previous market darling that has the farthest to fall – and why not? Popularity drives up prices and valuations. In contrast, small cap and value stocks did not suffer much in the bear market of 2000-2003 largely because they were already (relatively) unpopular before the crash, and so did not have far to fall today. Perhaps the same could be said for today’s laggards (international stocks and emerging markets, perhaps?)

DISCLAIMERS: Investing is risky, and you can lose money. Diversification does not prevent losses, and may not work to reduce risk in every situation. Charts above are estimates with data compiled from returns measured on commercial stock indices. These are hypothetical and not representative of any specific investment product or strategy.

Dimensional Fund Advisors is the biggest mutual fund company you never heard of.

And they are unlike any other mutual fund company. The firm does not sell directly to investors at all. They do not advertise (at least not as far as I have ever seen). They do not pay commissions to brokers or advisors. They don’t have wholesalers sending me chocolates, buying me lunch, and telling me how they are so much smarter than all the other fund companies. They do not engage in “revenue sharing” in which they pay brokerage platforms (like TD Ameritrade, Etrade, etc.) to be on a “No Transaction Fee” platform. In fact, they don’t do any of the normal things mutual fund companies do to sell their product.

Yet Dimensional is one of the fastest growing fund companies in the industry. What’s the deal? How is a company with little visible marketing effort so phenomenally successful?

Well, maybe they just have a better way to invest.

I had heard of DFA through reputation. I knew that they had a unique approach to low cost “passive” investing which was built on the work of several Nobel Prize winning economists. (passive is the wrong word for what they do, but I will use it to differentiate from traditional “stock picking”) As I have been shifting more and more toward low cost investment products, I wanted to know more, so I gave them a call.

Here again, DFA is different. Their initial response to my call was not to tell me how great their product is, but to grill me on MY business. They wanted to know about how I work with clients, about my investment philosophy, how I charge clients, and more. Once they were satisfied that my business was a good match, I was informed that I would not be able to use their products until I went through a 2 day training class in California or Texas.

Well, I must say, California sounded good to me in February, and I did want to learn about the DFA secret sauce, so off I went. During the two days I spent in class listening to various PhDs and Nobel prize winning economists speak about investing, I felt somewhat intellectually inferior – but I returned a convert.

Here in a very simplistic nutshell is what makes DFA funds unique.

They use an index like approach to gain low cost access to nearly the entire market. Cutting down on fees means higher returns all else being equal. That is just common sense and doesn’t take a PhD.

They do not use a traditional index like the S&P 500, but build their own index re-weighted and optimized based on those factors (dimensions, hence the name) which academic research has demonstrated to drive long term equity returns.

They keep trading costs and trading volume to an absolute minimum which cuts expenses and reduces tax burden on investors.

While most fund companies focus on “how can we get the most investors to use our fund” the focus at Dimensional always seems to be on improving efficiency, reducing costs, and providing the best risk adjusted returns to end investors.

Proof is in the pudding, and this is all just academic theory until it is put to work. My own analysis shows that the funds and indices they are modeled on do in fact outperform broad market indices consistently over most 10 year time periods. Performance is also far better and more consistent than the vast majority of actively managed mutual funds. Of course, past performance doesn’t predict or guarantee future results, and this is still investing in markets which entails risk of loss, but I find the research is compelling, the logic is sound, and the funds are as cheap as they come, so our investment clients can expect to start seeing Dimensional products in their portfolios in coming months.

To learn more about Dimensional, you can read this recent cover article in Barrons, or view the below videos explaining Dimensional’s history and philosopy.

Maybe its time Washington lives up to the same standards they want to impose on Wall Street

The Obama administration is now coming out in favor of proposals which would require investment advisors (including brokers) to act in their client’s best interest. Those of us who are Registered Investment Advisors have been subject to this standard since 1940 and make a fine living trying to do the right thing, but Wall Street brokerage firms are exempt under current law. They don’t have to act int their clients best interest – their only have to not do anything too bad. (that’s my interpretation of the rules anyway). So Wall Street hates the idea of a fiduciary obligation, and spends lots of money trying to convince Congress that bad things will happen to people if the financial industry can’t sell them expensive complicated products they don’t understand, don’t want, and don’t need.

Readers know I am no big fan of Wall Street. And I can’t see how a little “acting in the client’s best interest” wouldn’t kill the financial industry (but the fact that they claim it will does say a lot about Wall Street!)

But President Obama’s new push has me wondering. Why can’t we have a law that requires CONGRESS and the ADMINISTRATION to be fiduciaries when it comes to the retirement funds THEY control? If an investment advisor stole from a client’s account to satisfy his own spending needs, that advisor would go to jail (even without a fiduciary obligation). But now those who are in control of a bankrupt Medicare system and an actuarially broken Social Security system are going to tell financial advisors that they should act in their client’s best interest?

Hypocrisy and Washington always have gone together like peas and carrots. This is just another fine example.

Why you can’t believe everything you read, see, or hear in the financial news.

So the market has been going up now since 2011 without a correction of 10% or more. That has a lot of people worried. “The market is near all time highs” I am told, “it must be time to get out.”

One thing you learn in this business, however, is that nothing “must be”. And truth is, I’ve been hearing very smart people tell me why it is a terrible time to invest in stocks pretty much non-stop almost as long as I’ve been in the business.

The financial media make their living stoking fear and greed in the hearts and minds of investors. What is interesting is that, while we advisors must take great pains to explain that our predictions are not guaranteed, and that anything could happen – the media are under no obligation whatsoever to disclose that they actually are clueless. They can say whatever they want. They can also rely on the fact that 99.9% of readers will forget about any specific prognostication within a few days, so they don’t even need to be right.

Well, just for fun, let’s take a look at what it might have cost you to follow certain “timely advice” from the financial media.

What actually happened: The publication was followed by 3 years of extremely strong gains by the S&P 500, with annualized gains in excess of 25%.

Publication: Business Week, August 13, 1979

Headline: The Death of Equities: How Inflation is Destroying the Stock Market

Synopsis: The magazine claimed that “the death of equities….is a near permanent condition” suggesting that investors should give up on stocks and invest in gold.

What actually happened: $10,000 invested in the broad stock market in August of 1979 would have grown to $190,000 over the next 30 years. A $10,000 investment in gold in 1979 (apx price = $300/oz) would have grown to only $31,350 over the same 30 year period. The nation’s most prestigious business publication at the time couldn’t see that stocks were poised to enter the longest bull market in history. Stocks would post negative returns in just 3 calendar years in the next 2 decades (including 1994 with a paltry loss of -1.4%)

Publication: Money Magazine, April 2004

Headline: Why Ipod Can’t Save Apple

Synopsis: Hindsight is great – but not so great for the writer of this article! Speaks for itself. In fact, I’m surprised they haven’t pulled this article from web out of sheer embarrassment.

What actually happened: $10,000 invested in Apple at $25/share in 2004 would be worth (hold onto your hat) over $380,000 today, only 10 years later! Apple has probably made more people rich than any other stock in American history. Not this reporter apparently.

Publication: Money Magazine, December 2001

Headline: “America’s Safest Stock” “As Close as You’ll Get to Owning an Invincible Earnings Machine.”

Synopsis: I hate to constantly pick on Money Magazine, but who can resist this one? The article touted none other than Fannie Mae as America’s Safest Stock in 2001.

What actually happened: Well, you may already know the rest of the story. Fannie Mae had to be rescued and nationalized by the U.S. government during the financial crisis of 2008. Investors were largely wiped out.

Synopsis: Forbes is known to take a conservative political stance, remember Stephen Forbes was a onetime Republican presidential candidate. The position was that Clintonian policies were bad for America.

What actually happened: Stocks (S&P 500) generated a compound return of 18.5% over the next 7 years. Maybe political opinions and investment advice shouldn’t mix?

We could go on and on. As you look back over time it becomes abundantly clear is that opinions expressed in financial media, books, talk shows, etc. regarding the direction of markets or the broader economy are, if not completely useless, then pretty darn close to useless. Don’t invest based on what you read in the media or see on the internet. They are in business to capture readers and viewers for their advertisers, not provide sound investment advice!

According to the Employee Benefit Research Institute (EBRI), 74% of 401k plans offer some kind of “target date retirement” funds. These are funds which purport to diversify your investment across asset classes based on your estimated retirement date. The further away the retirement date, the heavier the allocation to equities (stocks). As the target date draws nearer (or passes, indicating the individual may already be in retirement) the asset allocation shifts more in favor of fixed income and cash investments. The funds are supposed to be simple one stop solutions to the question of how to invest your 401k funds for retirement.

The EBRI also states that 41% of investors use the target date funds in their investment mix, and 15% of 401k assets are held in target date funds. The implication (confirmed by my observations in the field) is that many people use Target Date Funds in their 401k, but it is usually not their ONLY holding.
The problem is that mixing Target Date Funds with other investments may defeat the very purpose of the fund.

Used correctly, a Target Date Fund should usually be the only holding in your 401k. Why is this? Aren’t you supposed to diversify your holdings? Well, yes and no. Of course, diversification is important. It is not good to have all of your assets in stocks (unless you are a young and aggressive investor). Likewise, being all in cash likely won’t help you achieve your goals. Balance is important. But the Target date funds are already diversified by their very design. They split their investment dollars amongst many other mutual funds covering all major asset classes, according to how the issuing company feels that the average person retiring at that date ought to be invested. Since the fund has diversified for you – there is really no need to diversify further.

What I see people do (and supported by the EBRI statistic above) is invest a portion of their portfolio in the Target Date Fund, and then add several more investments around it. Maybe the thinking is that investing can’t really be this simple – I must have to do more! But these additional funds are unnecessary for most investors, and make sense only if you are trying to accomplish one of the following objectives:
a) You are retiring near the Target Date, but are adding stock investments because you believe you are more aggressive than the average investor your age.
b) You are retiring near the Target Date, but are adding cash / bond investments because you believe you are more conservative than the average investor your age.
c) You are much smarter than the people making the asset allocation choices at the mutual fund company in question, and are adding positions to compensate for errors in the fund’s investment strategy (Just kidding on this one).

While this can work for some investors, it is difficult to really understand how the funds you have added to the Target Date funds will impact your risk exposure. This is why mixing the Target Date funds with other investments can defeat the purpose of owning a Target Date fund in the first place.
If you feel the Target Date allocation is too aggressive or too conservative for your taste, there is a much easier solution. If you are more aggressive than the average investor of your age, then choose a Target Date fund 5 years later than your actual planned retirement. If you believe you are more conservative, choose a date 5 years sooner than your planned date. This way you can be pretty sure you have a fund which is well diversified, consistent with your retirement goal, and offering a level of risk you can live with.

Questions about your 401k or other investments? Give us a call. Our fee only financial planning services and advice can help you make better financial decisions and keep you on track to achieve your most important goals.

But you won’t hear much complaining from Congress or the President (yet)

OPEC is waging war against the US with a new weapon. One we’ve never seen before. For the last 35 years or so, OPEC’s weapon of choice was the ability to turn off its oil spigots. The rest of the world would shudder at the thought.

Gradually though, OPEC has been losing relevance. They now only control about 40% of global output. Over the last three years, that influence has been slipping faster than ever as U.S. oil production skyrockets.

So faced with losing all its power, OPEC is trying a new strategy. Pump as much oil as possible and, in concert with the U.S. shale producers, flood the market with cheap oil. Why would they want the price of oil low? That is indeed the question.

It really makes no sense from an economic point of view. After all, if OPEC were to cut production by a few million barrels a day, they could remove the entire current surplus and the price of oil would likely go back up to $80-90 per barrel – almost double. Their revenues would be far greater for selling less oil. It seems to be in their self interest if their goal is simply to maximize revenues.

But if their goal is to once again become a force in the global economy, then their current strategy might make sense. They need to cripple the U.S. shale drillers and Canadian tar sand processors who are stealing their market share. They realize surely that if they cut production they will make more money – but so will the other world players (who will keep producing full tilt). Maybe they just think it’s not fair that they do all the work while the other 60% of oil producers reap the benefits – or perhaps they really do intend to destroy their competition.

What OPEC has that none of the other producers have is the ability to produce lots of oil cheaply. Their oil sits under desert sands in huge wide open deposits. Stick a straw in the ground and oil comes up; no deep ocean drilling, no boiling tar sand to release trapped oil, no fracking or miles of horizontal drilling under the ground. So OPEC knows it can survive regardless of the price of oil. And it knows that many of its competitors cannot.

If OPEC persists with this strategy, U.S. consumers will be seeing very cheap gas prices for quite some time. Our domestic oil producers won’t be so happy. Nor will the high yield bond markets. Drilling for oil takes a lot of money, and many oil drillers have borrowed lots of money in their quest for the Texas Tea. The problem is they need to be selling oil at $80 a barrel to make enough money to pay back their loans. Cheap oil on a sustained basis means the more indebted drillers will likely default and declare bankruptcy.

I sense a big yawn coming from most readers. Who cares? I LIKE paying $1.95 a gallon! But it may impact all of us through the financial markets. No one thought the mortgage crisis was going to hurt anyone except a few sub-prime lenders. Wrong! If default rates on high yield bonds escalate, I would be surprised if it does not send shock waves through other markets.

The risks aren’t limited to junk bonds. Emerging market debt is another area that could be at risk (and which also may have broader implications). Venezuela is almost certain to default on debt (even without the oil price collapse, they were at risk. Russia is increasingly a threat as well. On the flip side, emerging markets that import a lot of oil (India, Indonesia, Thailand, Philippines) stand to benefit greatly. Still, we learned from the financial crisis that the financial system is highly interconnected, and pain in one place, whether it be US junk bonds or emerging markets debt, can quickly spread throughout the financial system and economy. It will pay to be watchful.

So what is an investor to do? Well, as you know you cannot go running to cash every time there is the threat of a crisis. There is ALWAYS the threat of a crisis. And it is just too soon to know how this might play out. Consumers will benefit from low prices. So will many businesses. And low prices will eventually cause cutbacks in supply as producers choose not to drill new wells at these prices, thus reducing the glut which is driving prices down. But this takes time. And the driller who is struggling to pay his debts is unlikely to stop drilling – even $40 a barrel is better than selling nothing at all! But some experts are predicting that the farther the price falls today, the more dramatic the future supply cutbacks may become – and if reduced supply runs headlong into increased demand from businesses and consumers gorging on cheap energy – lookout. In that environment prices may bounce back with a vengeance and the survivors (including the OPEC gang but also our energy majors and less indebted shale drillers) will be duly enriched. Just don’t expect this to play out in months; it will more likely take years. These are interesting times to be an investor.

All of you investment geeks out there are familiar with the debate: are the actively traded mutual funds we are all so familiar with any better than a simple low cost fund which mimics an index of stocks such as the S&P 500.

NerdWallet recently released an interesting study on the topic, which you can read here if you are interested in all the statistical mumbo jumbo. But here is my summary of the key results.

Only 24% of actively managed fund managers beat their benchmark index over the last 10 years. This result should not be too surprising in direction – but it is surprising in degree. I have not seen under-performance to this degree published before. But wait, there are a few other interesting points from the study…

If you strip out the management fees from the funds, actively managed funds actually outperformed their indexes! The writer interprets this to imply that on average managers actually do outperform the market, but not by enough to offset their fees!

Actively managed funds do add value in managing risk. The study found that volatility in returns (i.e. difference in ups and downs) was significantly less for actively managed funds than for index funds. Perhaps this is because managers have the option of holding more cash or taking defensive positions when markets are overvalued – the study does not offer an explanation, only the result. This has important implications to new investors, many of whom express a belief that index funds have less risk than actively managed funds. INDEX INVESTING DOES NOT REDUCE RISK OF LOSS! In fact, the study confirms the opposite. Being invested in stock index funds means you are 100% exposed to the stock market index that your fund tracks. That is good when the market goes up, but it offers no protection when the market goes down!

Risk adjusted returns between actively managed and index funds are comparable. This means the lower risk in actively managed funds more or less offsets the deficit in performance (lower returns may be ok if risk is lower too). Everyone wants market returns when the market is going up. No one wants market returns when the market is going down. Effective investment management shouldn’t be about “beating the index” every year – it can be just as much about reducing losses when the market falls.

Large funds perform better than small funds. I suspect this out-performance is better explained by lower fees of many large funds. I wish they would do a follow-up study on how the least expensive quartile of active funds performed vs. the index.

Actively managed fixed income funds did ok. This seems to support my own belief that the bond market is less favorable to index investing generally, and active management may be preferred in the fixed income space. I have technical reasons for my belief too complicated to get into here. Fees are becoming an issue however. With ultra low interest rates, it is harder and harder for funds to earn enough to cover their expenses and generate an attractive return for investors.

Can we have the best of both worlds? Why not? There is no magic to index investing. Many funds that do NOT religiously track an index also have very low costs. And these funds tend to outperform as well. Perhaps it is best to recast the debate from one of “do index funds outperform actively managed funds?” to “do low cost funds outperform high cost funds?”

At Financial Pathways we have been increasing our use of low cost funds in our managed accounts. We have been using more index based Exchange Traded Fund and low cost mutual funds, and have been while turning away from more expensive mutual funds. The research may not be perfectly clear on active vs. passive as an investment strategy, but it is becoming clear that fees matter and all other things being equal, lower fees are better.

As I predicted, we are already seeing the beginning of the next tidal wave of controversy over the Affordable Care Act (aka Obama-care). http://blogs.wsj.com/washwire/2015/01/05/obamacare-and-tax-complications/

As we head into tax season, many individuals of modest means may find they are losing their tax refunds, or need to write large checks to the government.

This is going to be a huge surprise to many who either a) made more money than expected in 2014 or b) didn’t understand how the “subsidies” for health insurance actually worked.

For individuals or families with incomes that are within 400% of the poverty line (this is as high as $95,400 for a family of four) the ACA offered tax credits to help pay for health insurance through the exchange.

Now normally, you receive a tax credit as a direct refund of taxes owed, so you don’t actually receive the money until you file your taxes. But Congress recognized the cash flow strains of modest income families, and decided to offer a means of getting the tax credit right away. The exchange would ask the applicant to estimate what their 2014 income would be, and would then use that estimate to PREDICT the tax credit the individual MIGHT receive if their income estimate was correct (remember – they are estimating 2014 income in November of 2013!) Then they allow the applicant to use the ESTIMATED tax credit to help pay for their premiums throughout the year.

In effect, the government is giving the insurance applicant an ADVANCE ON THEIR 2014 TAX RETURN.

Here is the HUGE problem. Many people have estimated their income incorrectly, and will not actually qualify to receive the tax credit. If they have already received it – guess what? The government wants it back. If 2014 rises above the subsidy threshold by even $1, a household may owe the government back some or all of the subsidies received throughout the year. That could be anywhere from hundreds to many thousands of dollars, which most people of modest means will not be able to afford.

The IRS compared the estimates provided in the applications to 2012 tax data in an attempt to catch errors, but a lot can change in 2 years. Here are just a few of the possible errors that could happen during the course of a year:

A child in the household starts working a part time or summer job. The ACA tax credits are not based on the parents income, as on the joint tax return, but on HOUSEHOLD INCOME including the kids. So a child going to work and earning $2000 for the summer could end up forcing the family to repay thousands in subsidies.

A contractor or small business operator makes more money than expected.

A commissioned salesperson has a good year.

An employee receives an unexpected bonus.

An early retiree takes extra money from an IRA to fix a leaky roof.

An employee takes a new job, or gets a promotion.

Requiring people to predict their income for a year in advance and then penalizing them heavily for making more money is a terrible idea! It incentivizes people to work under the table to maintain subsidies. It penalizes those who take an extra job to help make ends meet, and the family whose spouse or child take a part time job to help pay the bills.

This week I finally brought my own family’s personal financial planning into the 21st century. Not sure what took me so long!

For years I have been a diligent (anal?) collector of budget data. Using Quicken software, I have laboriously imported and categorized almost every transaction made using any of my family’s accounts. I setup links to credit cards, banks, investment accounts, etc. I would even split up and allocate mortgage payments into escrow, interest and principle, and then later record the escrow disbursements to pay for homeowners insurance and property taxes. This is what I would do for fun on Friday night (and somehow I am still married!)

The problem is that I began to find that all the data I was collecting was not helping me at all in the all-important exercise of setting up a budget and communicating that budget to the rest of the family, especially my Chief Financial Partner and spouse, Laura. The data was there all right, but it was simply too hard to see, interpret, and use to be useful on a daily basis.

So it was time to try something new.

While visiting the app store with my phone, I decided to download Mint.com, a personal finance / budget app. Using only my phone, I quickly setup links with my key financial institutions, namely my bank and primary credit card. The system downloaded the past 3 months of financial transactions and automatically categorized the expenses as best it could.

With historical data in place, it was time to set about creating a budget. For this I put down the phone and went to my trusty laptop. What Mint wanted to do was to help me create a budget using the categories it had automatically assigned to all my transactions. Well, that might be ok for most users, but I am a little picky about such things, so I took the time to browse through the transactions and fix what Mint had done. What is really cool is that I can tell Mint to remember a category I assign, and to always use that category when it sees this same payee in the future.

Check payments (yes, I still pay a few things by check) are a little more complicated. It can’t assign a category, because it can’t identify who the payee is on a check. I have to look up each check and edit manually. But we are down to maybe 10 checks a month at this point, so this is only a 5 minute chore.

Once I was satisfied with the way all the income and expenses were categorized, I let Mint start building my budget. This was a little more awkward than it could have been, but still was seamless when compared to the Quicken system. Using the past 90 days history it had imported, Mint would suggest a budget amount for each category, such as groceries, movies, mortgage and rent, etc. I could either accept, or modify based on what I wanted that budget to be. I can even tell Mint whether a budget is reset every month (i.e. use it or lose it, like the cable bill) or if it will carryover (such as a vacation or car repair budget which will increase monthly until you spend it later). I kept at it until all spending and income items were included in the budget.

Here is why I love Mint.

Once you set Mint up, it is extremely easy to maintain. Data imports automatically every day, and most items are properly categorized automatically (once I trained it to use the categories I like). Most importantly, every budget item is graphically represented in a simple row of green bars. As each category’s budget is spent, its bar gradually turns red. If I exceed a budget item, I can be alerted by email.

For a budget system to really work, it needs to be easy enough to use every day with a minimum of effort. With Mint, I (or my wife) can pull out the phone, load the app, and immediately see how much of our “lawn and garden” budget we have used before I go out to the nursery to buy a trunk full of shrubs and perennials. If the budget allotted to lawn and garden is all spent, I have two choices: Wait until next month, or “borrow or steal” money from another budget category.

The ability to make these “on the fly” budget changes is critically important. A budget system can’t be too rigid, or it simply won’t work in the real world. Mint makes it as simple as clicking arrows to increase or decrease a budget category, all the while showing you how much total money you have left in your overall budget. So if there is no more money in my fishing tackle budget, it takes me 30 seconds to move money from my wife’s clothes shopping budget (but we’ll keep that our little secret!)

Another important feature is the ability to establish and track clear saving goals, so that saving for college or retirement take on the same importance as all our other spending goals.

I will report back after using this app for a few months, but I am extremely impressed with my initial experience. I will still use Quicken for my more complex tasks, such as business expense tracking, and investment account activities – but I think Mint will be my “go to” app for daily household budgeting.

Need help setting up a budget for your family? Give Financial Pathways a call, we’d be happy to help. After all, getting spending and debt under control is the very first step on the road to financial freedom. We’d love to take that first step with you.

The magic number used to be 10%. If you saved 10% of your pay consistently into your 401k, it was said, you would be able to retire in comfort.

New research is suggesting a higher number, see this article from Investment News.

But wait a minute and let’s read between the lines, and consider the harsh realities of life.

The article admits it is basing its assumptions on an individual in their mid 30’s who has not started saving yet. They point out that a young person just starting out can be fine with saving 8-10% of their pay. In other words, the old 10% assumption isn’t obsolete at all. It was always assuming a lifetime of savings at that rate.

The article also admits that it is quite difficult to get people in their 30’s to save at this level. If we think about it, that makes sense. This is the age when people are buying their first homes, having children, still paying student loans in many cases, and often stretched to their financial limits. So does that mean they are doomed to retirement poverty?

Not necessarily. There are two ways to make up for the fact that saving can be especially difficult during the middle years of life. The first (and best) as already mentioned is to save aggressively early in life. Money saved early on can benefit from many years of compound growth. I have noticed that individuals who started saving in their twenties tend to come into retirement with very healthy retirement accounts.

But this is the real world, and we all know that twenty-somethings are not very good at saving. Frequently they are struggling to get their careers on track, living hand to mouth, struggling with debt, and have priorities other than retirement.

Most people then wind up playing catch up. And this is not necessarily a bad strategy, even if it is a bit risky. As people get into their mid to late 50’s, they may find their mortgages are paid off (or at least the mortgage payment seems less onerous than it was in their 30s), kids are finishing college (if they didn’t wait too long to have kids!), and hopefully they are in their peak earning years in their careers. That all adds up to significant free cash flow which can be plowed into retirement savings.

Traditional advice indicates that waiting to save for retirement is a bad idea because you need to save such a large percentage of your income that it is simply not feasible. But for many people, saving large sums of money later in life is MUCH MORE FEASIBLE than saving smaller amounts earlier in life.

Don’t get me wrong, it is still best to save early, save aggressively, and save often. If you can manage 15% (including the employer match) then by all means do so! The catch up strategy entails many risks, including a shorter time horizon increasing investment risk, and health issues that impair your earnings ability later in life. But if you can’t manage 15% of your pay right now, don’t panic. Avoid tapping home equity with cash out mortgages, don’t overspend on college, and you may find you can kick savings into high gear in the last decade of your career. Believe me, you won’t be alone in that effort!

Additional meeting locations are conveniently located throughout north and central New Jersey, including: Freehold, Lawrenceville, Morristown, Parsippany, Princeton, Red Bank, Roseland and Short Hills.

Whether it’s household budgeting, tax planning, investment strategies or small business planning, you can feel confident that our team of expert, Certified Financial Planners will help you get on the right path.

Financial Pathway Advisors LLC is a Registered Investment Advisor in the state of New Jersey. We do not offer investment advice outside the State of NJ except as permitted under state and federal securities regulations.